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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
This appeal by the assessee is arising out of the order of Commissioner of Income Tax (Appeals)-49, Mumbai, [in short CIT(A)] in appeal No. CIT(A)-49/IT-280/2014-15 dated 30.11.2015. The Assessment was framed by the Asst. Commissioner of Income Tax, Centre Circle-42, Mumbai (in short ACIT/ AO) for the assessment year 2011-12 order dated 28.03.2014 under section 143(3) of the Income Tax Act, 1961(hereinafter ‘the Act’).
The only issue in this appeal of assessee is against the order of CIT(A) confirming the action of the AO in disallowing the interest of ₹ 25,93,056/-. For this assessee has raised the following three grounds: -
“1. On the facts and circumstances of the case and in law, the learned 01(A) erred in confirming the action of the AO in assessing the total loss of the company at Rs. 20,576/- as against the returned loss of Rs.26,13,632/- .
2. On the facts and circumstances of the case and in law, the learned CIT(A) erred in confirming the disallowance of net interest of Rs.25,93,056/- debited to the Profit and loss account.
3. On the facts and circumstances of the case and in law the learned ClT(A) erred in confirming the disallowance of Rs.25,93,056/- for the reason that no cogent evidence in support of appellant's claim of funds being acquired for business purpose were produced."
Briefly stated facts are that the assessee is a private limited company engaged in the business of land development and construction of buildings. The assessee filed its return of income for the relevant AY 2011-12 on 30.09.2011, declaring business loss of ₹ 26,13,632/-. The AO during the course of proceedings noticed that the assessee has claimed interest expenses of ₹ 1,67,04.690/- on loan obtained from Macro Tech Construction Pvt. Ltd. The assessee has also earned interest income of ₹ 1,41,11,634/-. The assessee claimed the differential amount of ₹ 25,93,054/- as loss after reducing the interest income earned and interest paid. The AO required the assessee to explain as to why the differential amount of interest claim of ₹ 25,93,056/- be not disallowed. The assessee before AO submitted the submissions but AO was not convinced and he disallowed the differential interest of ₹ 25,93,056/-. Aggrieved, assessee preferred the appeal before CIT(A). The CIT(A) confirmed the order of AO by observing in Para 7 as under:-
“7. I have considered the facts of the case, the stand taken by the AO in the assessment order, the grounds of appeal and the written submission filed by the appellant during the appeal proceedings.
The AO has disallowed net interest expenses of ₹ 25,93,056/- on the ground that the appellant has failed to provide the evidence or supporting document to establish that the huge amount of interest bearing advances had been taken for carrying out the real estate business. The interest expenditure can be allowed as deduction u/s.36(1)(u) of the Act the interest paid is In respect of capital borrowed for the purpose of the business or profession. The appellant has obtained inter corporate deposits and the same has been advanced to other parties. The appellant has failed to provide justification for borrowing the same amounts when there was no need of funds for its business The appellant has obtained to provide any cogent evidence in support of its claim that the funds were borrowed for business purpose only So the claim of net interest expenditure u/s 36(1)(iii) of the IT Act is not round to be justified Therefore, the disallowance of net interest expenditure of Rs 25,93,056/- made by the A 0 is found to be in order. Accordingly, the disallowance of Rs.2593056/- is upheld and ground nos 1 and 2 are dismissed. Ground nos 3 & 4 are against initiating penalty proceedings uls.271(1)(c), 271D and 271E of the IT Act. Since penalty proceedings has only being initiated, these grounds are found to be premature and are accordingly dismissed."
Aggrieved, now assessee is in second appeal before Tribunal.
We have heard the rival contentions and gone through the facts and circumstances of the case. Before us, the learned Counsel for the assessee stated that the assessee is engaged in the business of land development and construction of buildings and this being the first year of operation of the assessee it returned a loss of ₹ 26,13,632/-, which has accrued on account of the claim of interest expenditure of ₹ 1,67,04,690/- as against the interest income of ₹ 1,41,11,634/-. The AO and CIT(A), according to the learned Counsel for the assessee, were of the view that the assessee was not involved in any business activity and has taken huge unsecure loan to the extent of ₹ 116,73,36,364/- and advanced this loans to various group concerns. The learned Counsel for the assessee stated that this advance of ₹ 116,73,00,000/- was received for land purchase as the assessee is engaged in the business of land development and construction business. The assessee explained that the company through its directors try to find out the suitable land and purchase the same for the purpose of development thereof and trade therein but could not succeed. The amount of loan taken at the interest of 12% was advanced after few months at the rate of 12%. The learned Counsel filed the chart of the parties from whom loans were taken which reads as under: - Name of the parities Amount of loan Amount of loan Closing balance Interest taken repaid Lodha Crown Buildmart 20,00,00,000 20,00,00,000 Pvt. Ltd Macro Tech 113,33,33,221 20,00,00,000 93,33,33,221 1,67,04,690 Construction Private Limited Suryodaya Buildwell & 38,06,52,838 346650695 34002143 Farms Pvt. Ltd Total 171,39,86,059 54,66,50,695 116,73,35,364 1,67,04,690
The learned Counsel for the assessee stated that as and when the assessee realized that nothing is being materialized on account of purchase of suitable land, he advanced this amount on interest to group concerns at the rate of 12%. The learned Counsel for the assessee stated that these funds were borrowed for business purpose only and no other purpose. The learned Counsel contended that once the assessing officer as well as CIT(A) has accepted that the part of interest is liable, he could not disallow part of the same. For this he relied on the decision of Hon’ble Supreme Court in the case of Taparia Tools Ltd. VS JCIT (2015) 372 ITR 605(SC) wherein Hon’ble Supreme Court has held that once it is found that the funds were borrowed for the business purpose only then the interest claim thereon has to be allowed under section 36(1)(iii) of the Act. The learned Counsel for the assessee referred to the portion of judgement which reads as under: -
“9. Ignoring the proviso and the Explanation in clause (iii) above, with which we are admittedly not concerned in this case, it is clear that as per the aforesaid provision any amount on account of interest paid becomes an admissible deduction under Section 36 if the interest was paid on the capital borrowed by the assessee and this borrowing was for the purpose of business or profession. There is no quarrel, in the present case, that the money raised on account of issuance of the debentures would be capital borrowed and the debentures were issued for the purpose of the business of the assessee. In such a scenario when the interest was actually incurred by the assessee, which follows the mercantile system of accounting, on the application of this statutory provision, on incurring of such interest, the assessee would be entitled to deduction of full amount in the assessment year in which it is paid. While examining the allowability of deduction of this nature, the AO is to consider the genuineness of business borrowing and that the borrowing was for the purpose of business and not an illusionary and colourable transaction. Once the genuineness is proved and the interest is paid on the borrowing, it is not within the powers of the AO to disallow the deduction either on the ground that rate of interest is unreasonably high or that the assessee had himself charged a lower rate of interest on the monies which he lent. In the instant case, the AO did not dispute that the non- convertible debentures were issued and money raised for business purposes. The AO did not even dispute the genuineness of clause relating to upfront payment of interest in the first year itself as per the option to be exercised by the debenture holder. In nutshell, the AO did not dispute that the expenditure on account of interest was genuinely incurred. ……."
On the other hand, the learned Sr. Departmental Representative, heavily relied on the assessment order and the order of CIT(A).
We find from the facts that the AO has not disputed the genuineness of payment of interest receipt, interest on the loan borrowed and amount advanced. The only issue raised by the lower authorities is that the assessee has not taken these advances for business purposes. We find that once the AO has allowed part of interest for particular year, the genuineness is established. Secondly, even the purpose is also established. For this, the assessee has produced the resolution passed by Board of Directors of assessee company dated 26.092.2010, which clearly states that these loans secured or unsecured are for the purpose of the business. The copy of resolution was placed on record. Hence, the purpose is established. Even otherwise, we are of the view that the AO did not even dispute the upfront payment interest in the part of the year
and once this is the position, the interest cannot be disallowed. We allow the claim of the assessee and this issue is accordingly allowed. 8. In the result, the appeal of the assessee is allowed. Order pronounced in the open court on 03-08-2018.